McKinsey’s Systematic Under Valuing of Efficiency

Economy versus the Environment. This is a slogan for many when they consider the challenges of dealing with Climate Change and the reduction of greenhouse gas (GHG) emissions.

In 2007, McKinsey issued Reducing US Greenhouse Gas Emissions: How Much at What Cost? that provided a a significant contribution to this discussion. McKinsey’s conclusion: at an “affordable” cost of well below $50 per ton, in aggregate, the United States can meet necessary 2030 targets for GHG emission reductions. All-in-all, this was quite good news for those advocating acting to deal with Climate Change.

There was (and is) reason why the original study and McKinsey’s continuing work in this arena have been widely discussed / cited over the past two years. And, variants of the graphic on cost abatement have shown up in briefing after briefing, article after article, book after book. Good news.

Or, well, is it? McKinsey’s work provides significant data that addressing the environment will have economic cost. Even if a low number, with many actions providing economic benefit, the McKinsey work has a serious underlying thematic: it will cost to address climate change.

Perhaps not a horribly painful cost, but a cost nonetheless. While the McKinsey reports (and, again, the broadly used graphics) demonstrate that we can achieve a substantial portion of the necessary carbon reductions at a net positive for the economy, their discussions and representations leave this as a discussion of “cost” to take action, even if a far lower cost than self-proclaimed “climate skeptics” and others working to hinder a move toward a clean energy economy would claim.

Is this, that action on reducing carbon will “cost”, truly an accurate conclusion to draw from McKinsey report?

“The project … did not examine economy-wide effects … Did not attempt to address other societal benefits from abatement efforts, such as improved public health from reducing atmospheric pollution or improving national security. …”

In other words, this is a highly conservative and stove-piped analysis. The conservative approach almost certainly significantly overstates the costs for Global Warming abatement while potentially just as significantly understating the benefits of system-of-system interactions.

Lets take just a few examples of how this stove-piping might have distorted the end results:

And, this is a ‘positive feedback': if a group of buildings ‘goes white’, every building owner gains even more due to the reduced ambient temperature lowering air conditioning demand and improving efficiency of cooling systems. Shouldn’t such ‘positive feedbacks’ be part of the equation for considering costs?

In other words, the national security and trade balance and health and jobs and other benefits that McKinsey seems to have excluded from the analysis likely make the net result from addressing Climate Change a positive benefit, rather than a negative cost, for the economy.

There is yet an even greater ‘uncounted’ element that tips the scale from “cost” to “benefit”: the ‘insurance’ value of mitigation efforts reducing the future impacts of catastrophic climate chaos. While humanity already faces real economic (and other) impacts from climate change and those will grow more significant in coming years, mitigation efforts offer the potential for reducing future impacts and future costs.

This, however, is yet again explicitly not part of McKinsey work:

The project did not attempt to assess the benefits to society from reducing global warming.

When one begins to assess the myriad of direct and indirect benefits excluded from the McKinsey work, their conclusion that we can successfully take action to mitigate climate change for costs below $50 per ton of carbon begins to look quite pessimistic. Counting in that ‘insurance value’ and the benefits of reducing climate change impacts, the famous graphic begins to look like a dire doom & gloom scenario.

The analytical caution (‘conservatism’) ends up fostering a discussion about relative amounts of cost of action (high or low cost of action) when the real societal discussion should be the costs of inaction in the face of ever-more conclusive scientific work on climate change and the benefits from acting to mitigate climate change.

NOTE: The “problem”, here, is not with the McKinsey team (at least not fully). Modeling and valuing ‘positive feedbacks’, attempting to quantify productivity gains across society from ever-‘greener’ work places, and placing meaningful figures on the ‘insurance value’ of mitigation are not simple tasks.

And, the McKinsey team forthrightly and explicitly laid out that they did not attempt to take on these sorts of challenges. The problem lies with those who ‘crib’ from the McKinsey work while failing to highlight the study team’s openly stated constraints that fostered a pessimistic statement about the true value of action.

Also, to reinforce, this is not ‘solely’ an issue with McKinsey & Co work. Here are some related discussions:

About Author

Walter’s contributions to CleanTechies over the past 4 years have been instrumental in growing the publications social media channels via his ongoing editorial and data driven strategies. He is the founder and managing director of Sunflower Tax, a renewable energy tax and finance consultancy based in San Diego, California. Active in the San Diego clean technology community, participating in events sponsored by CleanTech San Diego, EcoTopics, and Cleantech Open San Diego, Walter has also been a presenter at numerous California Center for Sustainability (CCSE) programs. He currently serves as an adjunct professor at the University of San Diego School of Law where he teaches a course on energy taxation and policy.

Great analysis! I actually think that the economy versus the environment framing is false in its entirety. Some industries will absolutely be adversely impacted by the development of a low-carbon economy. But industries have been impacted by change throughout history and. No amount of dragging our heels or protective policy is going to stop that.

From a U.S. standpoint, as the rest of the world begins to implement carbon reduction policy, we will be placing ourselves at a severe competitive disadvantage if we fiercely defend the status quo. And if we are running into or have already passed the point of peak oil, we are crippling ourselves by sitting around arguing about economy vs. environment.